By Rochelle Toplensky
Breakups are never easy, but taking time to do it properly can be better for everyone.
Earlier this month insurer Prudential PLC confirmed plans to split from its U.S. business Jackson National. Activist investor Third Point has pushed for a quick breakup, but the London-listed company is taking its time. That gives investors the chance to buy in before the shares rerate.
The 172-year old insurer has two main businesses: Jackson National, which specializes in retirement annuities for Americans; and a Hong Kong-based business selling health and life insurance and investments to the growing middle classes in Asia and eventually Africa. Both are profitable, but incongruously grouped together as Prudential they appear to fetch a lower valuation than they might if assessed on their individual merits.
To address this so-called sum-of-the-parts problem, Third Point pushed for a spinoff of Jackson directly to shareholders. Prudential instead plans to list the U.S. business through an initial public offering some time before next summer. It will retain a stake that can then be sold down gradually.
Low interest rates and regulatory changes have prompted many insurance companies to split into more focused businesses in recent years. Prudential has already been through the separation ringer, having spun off its U.K. investment business M&G last October.
Jackson specializes in variable annuities, a stock-linked retirement product that is "extremely complex to analyze," according to Third Point. It isn't the only investor to believe the unit's value isn't reflected in Prudential's share price.
In June, Athene agreed to buy an 11% stake in Jackson for $500 million, which implies a $4.5 billion valuation. Apollo-backed Athene is an annuities specialist and seen by many as a shrewd investor. The number also is broadly in line with the valuation multiple of rivals such as Equitable Holdings and Lincoln National. That offers reassurance that Jackson is indeed worth more than Prudential's stock price implies, but the shares haven't rerated since the news.
Jackson isn't expected to need additional capital: Its regulatory risk-based capital solvency ratio was within the IPO target range at the end of June. It is likely to issue debt up to Pru's target leverage range of 20% to 25%, but won't pay dividends until after the listing.
The breakup could prompt a re-evaluation of Prudential's Asia-based insurance business too. According to Chief Executive Mike Wells, "every dollar of capital invested organically in Asia new business created nearly six dollars of value." Third Point argued the business is "materially undervalued" and UBS sees upside of about 15%. Shares in AIA, a similar business, trade for 19 times prospective earnings, compared with just nine times for Prudential's stock.
To be sure, the IPO plan could be delayed by a second wave of the pandemic or other market disruption. Pru's Asian growth prospects, which are mainly focused on emerging markets like India and Indonesia as well as mainland China and the troubled city of Hong Kong, could also stall.
Yet a better valuation for Jackson doesn't depend on Asia, and the IPO plans are in place. Reassuringly, Mr. Wells has done this before. Divorces usually only make lawyers richer, but Prudential's is one from which investors could also benefit.
Write to Rochelle Toplensky at firstname.lastname@example.org